If you’ve ever had a cup of tea with a grandparent and chatted about “what happens after we’re gone,” you’ve probably brushed up against the slightly uncomfortable, yet incredibly important topic of inheritance tax. It’s one of those quiet financial issues that can lead to massive surprises. Not the good kind. If you don’t tackle it ahead of time.
Let’s break it down together and explore practical ways UK families can reduce the inheritance tax burden so more of your legacy goes where it belongs: to your loved ones.
What Exactly Is Inheritance Tax?
Let’s call it IHT for short. In the UK, inheritance tax is what’s potentially due when someone passes away and leaves behind assets. Like their home, savings, investments, or anything else that holds value. As of the 2024/25 tax year, the standard inheritance tax rate is 40% on anything over the £325,000 threshold. If you leave everything to your spouse or civil partner, there’s usually no tax due. The same goes for certain registered charities. But everyone else? That’s when the taxman comes knocking.
Now, here’s the kicker. Homes in many parts of the UK have jumped well above that £325k line, sometimes significantly. A modest semi in outer London or a family home in the southeast can easily cross the threshold, landing ordinary families with a tax bill that feels more suited to the ultra-wealthy.
So, what can you do about it?
1. Use Your Nil Rate Band (And Your Partner’s Too)
Every individual is entitled to a “nil rate band”—£325,000 that can be passed on tax-free. That figure hasn’t changed since 2009, and for many, it won’t cover the full value of their estate anymore.
However, if you’re married or in a civil partnership and leave everything to your partner, you don’t use up your nil rate band. That means your partner can stack their own £325k on top of yours, giving your children or other heirs a generous £650k buffer before IHT kicks in.
I once worked with a retired couple who had assumed their home would automatically be taxed heavily. After walking through the math, we realised they hadn’t used either partner’s nil rate band yet. Their kids were set to inherit significantly more than they feared, just by knowing the rules.
2. Make the Most of the Residence Nil Rate Band
Introduced in 2017, this tax relief can add an extra £175,000 per person when you pass on your main residence to direct descendants (children, grandchildren, or stepchildren). It can be a game changer.
Here’s how it stacks up:
- £325k nil rate band per person
- £175k residence nil rate band per person
- That’s potentially a combined £1 million for a married couple
There are rules, of course. If your estate is worth over £2 million, the residence nil rate band starts tapering off. A sneaky little clause that’s caught a few people off guard.
3. Gifting During Your Lifetime
Ever given your kids money and someone joked, “what’s the catch?” Here’s your opportunity for it to be a win-win.
Lifetime gifts can significantly reduce the size of your taxable estate. The important part is timing. Once you give a gift, it falls outside your estate after seven years. This is known as the “7-year rule.”
There’s a catch (isn’t there always?). If you die within seven years of giving a gift, it may still be taxed, depending on the timing and amount. That’s where “taper relief” comes in.
There are also smaller exemptions:
- You can give away up to £3,000 per year, tax-free
- Wedding gifts (£5,000 for children, £2,500 for grandchildren)
- Regular gifts from surplus income (but they must be genuinely regular and not affect your lifestyle)
One client of mine used to buy premium bonds for her grandkids every year as a Christmas tradition. Turns out, those counted as exempt gifts from surplus income. Not only was she building her grandkids a nest egg, but she was trimming down her estate without even realising.
4. Consider Setting Up a Trust
Trusts can be both an incredibly useful tool. And incredibly complicated. They’re not purely a tax dodge, but when used correctly, they can help plan your estate more efficiently.
For example, placing assets into a discretionary trust means those assets usually fall outside your estate. A trust also gives you control over when and how your heirs receive money. A handy safeguard if your children aren’t the best with money or are still quite young.
However, many types of trusts are now subject to their own form of inheritance tax (known as the “relevant property regime”), so it’s not a free pass. You’ll want an expert on your side for this one. Trusts aren’t casual DIY territory.
5. Leave Money to Charity
Generosity can be good for the soul. And your tax bill. If you leave at least 10% of your net estate to a registered charity, your overall inheritance tax rate may reduce from 40% to 36%.
Sometimes, this means that both your heirs and your favourite charity come out ahead. It’s worth doing the math or speaking with a probate solicitor to explore whether this might work for your specific situation.
6. Life Insurance in Trust
Buying a life insurance policy and placing it in trust is a clever move. The payout from the policy won’t form part of your estate, meaning it won’t be hit by IHT. Even better, it can provide a lump sum that helps cover the actual tax bill when it comes due. Effectively keeping your family from having to sell off assets just to pay the taxman.
I’ve seen this act as a real backstop for families who didn’t have the liquidity to pay an unexpected tax bill. In one case, it saved the family business from out-of-the-blue asset sales.
Just make sure the trust is set up correctly. A misstep in the paperwork can land the proceeds right back inside the taxable estate.
7. Get Professional Advice. Early and Often
I can’t say this enough: inheritance tax is personal. What works for one family might be a poor fit for another. And I’ve seen first-hand how DIY planning without legal or financial services expertise can lead to trouble later on.
That said, don’t wait until your later years to start. Planning early means you have more options. And often, they’re simpler, cheaper, and easier to implement. Speak to a financial planner who specialises in estate planning, and ideally someone who understands the FCA guidelines and current HMRC rules inside out.
“Delayed planning is like trying to apply sunscreen after you’ve been in the sun all day. It helps a little, but the damage might already be done.”
Frequently Asked QuestionsHow much can I give to my children tax-free?
You can gift up to £3,000 each tax year without it counting toward inheritance tax. That’s called your “annual exemption.” If you didn’t use it last year, you can carry it forward one year. Beyond that, larger gifts become “potentially exempt transfers” and fall outside the estate after seven years.
Do I need to report small gifts to HMRC?
Generally, no. You don’t need to report gifts that fall within the regular allowances (e.g. £3,000 annual exemption, small gifts under £250, etc.). But if you’re making large gifts that could affect your estate. Or if you pass away within seven years. Your executors will need detailed records. Proper record keeping now can make a big difference later.
Is my pension subject to inheritance tax?
Usually not. Most pensions can be passed on outside of your estate, which means they’re not usually subject to IHT. However, it depends on the scheme and how the benefits are structured. Some older-style pensions may differ, so always check the fine print or speak with your provider. Understanding pension contribution benefits can help with overall tax planning.
Can I use equity release to reduce inheritance tax?
Yes, but it’s complex. By using equity release, you reduce the value of your estate. Since the loan is repaid on death and reduces what’s left behind. But it comes with costs, interest debts, and some long-term impact, so tread carefully. Speak with a regulated financial advisor before making any decisions.
Are trusts still worth it with recent tax changes?
They can be, but the landscape has shifted. New rules since 2006 have made trusts less of a “tax loophole” and more of a structured planning tool. They’re still very useful in specific situations. For example, protecting vulnerable heirs or managing complex wealth. But don’t go it alone. Professional advice is a must.
Thinking about inheritance tax might not make for cheery conversation, but it’s one of the most important ways you can protect your family’s future. A bit of planning now can save heartache. Or even a forced house sale. Down the line.
If you haven’t had that chat yet, or you’re unsure whether your estate plan holds up under current rules, take the next step. Talk to someone. Get a review. Find the peace of mind that comes from knowing your legacy won’t be lost to bureaucracy and tax missteps.
After all, you worked hard for what you built. Make sure it ends up where it should.